A "marked rebound" in Irish consumer and business confidence after the threat of a no-deal Brexit receded is supporting a more optimistic outlook for the economy, the European Commission's latest economic forecast has predicted.
But there is considerable uncertainty about “the possibility of an abrupt change in trading relations” between the EU and UK beyond the end of the year, the report warns.
The commission expects Ireland’s GDP will grow by 3.6 per cent this year and by 3.2 per cent in 2021, having risen by an estimated 5.7 per cent last year. Only two countries are forecast to see faster growth in 2020: Malta at 4 per cent and and Romania at 3.8 per cent.
On average GDP is expected to grow 1.4 per cent in the EU and 1.2 per cent in the euro zone in 2020 and 2021. The forecasts were published in Brussels on Thursday.
Growth in the euro zone “turned out better than expected in the third quarter but disappointed at the end of the year”, the commission said. Leading indicators suggest that manufacturing output may stabilise in the months to come, although an upturn is not yet on the cards, the report says.
“However, with hints of a bottoming out in global trade flows, and as the dampening impact of domestic inventory adjustment fades, a trough may have been reached.”
Coronavirus fallout
The prospect of a significant economic fallout from the coronavirus epidemic on the whole European economy is also likely, warned Paolo Gentiloni, economic affairs commissioner. The scale of such a downside to prospects depends entirely, however, on the extent and duration of the epidemic and is not at this stage quantifiable, he said.
Since the Sars epidemic China’s share of the world economy had grown from 4.5 per cent to 17.5 per cent, he said, evidence of the potential impact likely, particularly on manufacturing and global supply chains. China now also represents 18 per cent of global travel expenditure.
In Ireland real GDP grew at the brisk pace of 5.9 per cent year on year over the first three quarters of 2019, driven by strong private consumption, exports and investment. The report says "the rise in the national minimum wage on February 1st should support the disposable income of poorer households".
Investment in construction continued at a rapid pace and residential property completions have surged. Construction permits suggest a continuation of this trend, the commission states.
“Domestic investment in equipment dwindled as small and medium-sized enterprises reportedly postponed investment due to uncertainty related to the terms of the UK’s exit from the EU. After large imports of intellectual property in 2019, the net export contribution to growth is expected to turn positive again this year and next.
“With the Irish economy operating at full capacity, service prices should continue to rise, but deflationary effects from imported non-energy industrial goods should keep overall HICP [Harmonised Index of Consumer Prices] inflation in check at 1 per cent in 2020 and 1.3 per cent in 2021.
Fragile equilibrium
At EU level, continued real income gains, a supportive policy mix and a construction sector buoyed by low borrowing costs, mean the European economy “is well placed to navigate the challenging external environment, high trade policy uncertainty and dampening structural factors. This is, however, a fragile equilibrium, which could be easily derailed by unforeseen events”, the report says.
Overall, the European economy remains on a path of steady and moderate growth. Over the next two years, annual GDP growth in the euro zone “is expected to settle at 1.2 per cent”, the same as in 2019. The outlook for 2020 and 2021 is unchanged since the autumn, as more positive developments are counterbalanced by negative events elsewhere.
“Economic fundamentals should provide the necessary resilience to external headwinds but remain insufficient to propel growth on to a higher trajectory,” the forecasts state.
“While there is now clarity about trading relations between the EU and the UK until December 31st, 2020, there is still considerable uncertainty about the long-term relationship and the possibility of an abrupt change in trading relations at the end of the year,” it adds.
